The future of ‘smash and grab’ adjudications and what it means for the construction industry

Posted: 23/04/2020

‘Smash and grab’ is the term used to describe an adjudication seeking payment on the narrow ground that the contractual payment mechanism has produced a ‘notified sum’ and this has not been paid. It does not require an enquiry into the ‘true value’ of the payee’s entitlement. This may arise because the payer has neglected to serve a payment or pay less notice. In those circumstances, can the payer adjudicate to establish the true value? If so, when?

At common law, construction contracts are generally regarded as ‘entire contacts’, meaning there is no entitlement to payment until the work is substantially complete. Interim payments are however a ubiquitous feature of construction contracts and the right to them is mandated by the Housing Grants, Construction and Regeneration Act 1996 (as amended) (HGCRA). Against this background, over several years the courts have made differing decisions as to whether it is possible to refer a dispute to adjudication over the true value of a payee’s entitlement at a particular valuation date if there is a notified sum, payment of which is required by s110(1) of HGCRA. For example, in ISG Construction Ltd v Seevic College the judge stated that conclusion "if the employer fails to serve any notices in time it must be taken to be agreeing the value stated [and] must be in principle taken to have decided the value of the work…" In Galliford Try v Estura the same judge said the employer is deemed to have agreed that valuation in the interim application. It follows from this reasoning that there could be no dispute over the true value.

In contrast, in the context of final accounts following termination/repudiation in Harding  v Paice and ICI v Merit, the courts held that the payer did have a right to challenge the true value.

The ability to challenge the true value is a very significant factor in the appeal of ‘smash and grab’ adjudication, so is of considerable importance to the industry. This issue was considered by the Court of Appeal in S&T v Grove in late 2018, to the effect that the payer does have a right to challenge the true value.

The question then arose: when can they do so? More specifically, could they do so before they have paid the notified sum?  At first instance in, Grove v S&T, the judge repeatedly stated that once the payer had paid then they could challenge the true value, but he did not explain the legal basis for stating that payment was a prerequisite. Nor did he say how, in practical terms, a payer could be prevented from adjudicating. The Court of Appeal stated that the impediment to doing so arose from the fact that s111 of HGCRA is of direct effect and that “As a matter of statutory construction .. the adjudication provisions are subordinate to the payment provisions …”

S&T v Grove left open the question of whether or not its findings meant that the second adjudicator would lack jurisdiction and if not, what the nature of the legal impediment was.

Subsequently in M Davenport Builders v Greer a true value adjudication was commenced and proceeded to a decision without the paying party have complied with an earlier decision requiring payment of the notified sum. The second adjudicator expressed doubts over whether he had jurisdiction, but agreed to continue. On enforcement, the court ordered payment of the sum awarded in first, smash and grab, adjudication. The judge stated “… the employer must make payment … before it can commence a 'true value' adjudication. That does not mean that the Court will always restrain the commencement or progress of a true value adjudication...”. Significantly, the court did not treat the second adjudicator as having lacked jurisdiction.

In a further decision, in Broseley London v Prime Asset Management, the employer applied for a stay of execution of an adjudicator’s decision requiring payment of a notified sum in respect of an interim valuation in the absence of a payment or pay less notice from the employer. The employer terminated the contractor’s employment after the interim valuation and one reason the employer gave in support of its application for a stay was to allow time for a true value adjudication in relation to the final account. The employer accepted that it could not start a true value adjudication in relation to the interim valuation without paying the notified sum, but argued that it could do so in relation to the final account. The judge disagreed. He described this as ‘a remarkable intrusion into the principle established in S&T’. This suggests that the courts are willing to extend the principle underlying S&T v Grove outside the particular circumstances of a true value adjudication in relation to the same (unpaid) valuation. Quite what the boundaries of this willingness will be remains to be seen. The court’s reasoning reinforces the view that the barrier to pursuing a true value adjudication is not a jurisdictional one. 

Frequently asked questions and possible answers

Is this the end of smash and grab adjudications? This seems unlikely because they can still produce payment. Considerations for payees as to the benefits of such an adjudication include:

• Can the payer recover any overpayment in a subsequent payment cycle in any event, either by recouping it against subsequent works or if the contract allows for repayment prior to the final account (as the NEC ECC does)?
• Does the payer believe in its grounds for non-payment? How quickly and easily can it prepare a claim?
• How do the short term / strategic benefits of payment compare to the cost / effort of adjudication(s)?

If the threat of a ‘smash and grab’ adjudication exists, should a payer launch a pre-emptive adjudication? This could be advantageous, but it would be at risk of the claim failing and/or injunctive proceedings.

How should a payee react to a pre-emptive true value adjudication? Options include:

• apply to court for an injunction;
• defend solely on the basis that non-payment of the notified sum is a substantive defence;
• defend primarily on the above basis but engage with the question of ‘true value’ in the event that this defence fails; and/or
• start their own smash and grab adjudication in parallel.

Not uncommonly there are reasons to challenge the validly of the ‘default payment notice’ relied upon by the payee, which affect whether there is a notified sum. What is the effect of this?

• If the smash and grab adjudication comes first, the first adjudicator will decide whether the default payment notice was valid.
• If the true value adjudication comes first, the second adjudicator could decide this issue if it is germane to the dispute referred to him/her.
• If the adjudications proceed in parallel, the second adjudicator may continue subject to the effect of a decision in the first adjudication prior to the decision in the second.

Despite the passage of time since S&T v Grove being decided at the end of 2018, there remain uncertainties as to how possible scenarios will be resolved in practice. The emerging trend appears to be that the courts would prefer to use their powers on enforcement to discourage parties from pursuing true value adjudications without paying a notified sum, rather than encouraging urgent applications for injunctive relief. One thing is clear, this is not the end of 'smash and grab' adjudications.

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